Barnier sends sterling to a five-week high on Brexit deal hopes

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LONDON (Reuters) - Sterling surged against the dollar and euro on Monday after the European Union’s chief negotiator said a Brexit deal was possible “within six or eight weeks” if negotiators were realistic in their demands.

FILE PHOTO - An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

For the second time in less than a week, Michel Barnier has signalled his desire to move ahead on the Brexit negotiations, less than seven months before the United Kingdom is slated to leave the European Union on March 29, 2019.

Barnier, the EU’s chief negotiator, told a forum in Slovenia that “if we are realistic, we are able to reach an agreement on the first stage of the negotiation, which is the Brexit treaty, within six or eight weeks.”

For a market broadly short on the pound because of worries that Britain will crash out of the EU next year without any sort of formal trading arrangement, Barnier’s comments were seized on as signalling that the UK may avoid a disorderly no-deal Brexit.

The British currency rallied across the board, rising more than one percent to $1.3052 GBP=, its highest level in five weeks. It later settled at $1.3021, up 0.8 percent on the day.

The pound also rose to a one-month high against the euro at 88.96 pence EURGBP=D3 while versus the Swiss franc GBPCHF=D3 it was headed for its biggest one-day rise in more than 18 months.

“It just shows that’s the key thing that people want to see — Brexit progress. You have a market that’s heavily short on sterling due to Brexit. It needs that tail risk to be taken off before sterling can rally,” said Viraj Patel, a currency strategist at ING in London.

Also on Monday diplomats and officials said EU leaders were likely to hold a special Brexit summit in mid-November when they hope to be able to sign off on a divorce deal with Britain.

GDP BOOST

Data earlier on Monday showed British gross domestic product in the three months to July was 0.6 percent higher than in the previous three-month period, at the top end of forecasts..

Sterling has rallied in recent weeks off lows below $1.27, lifted by recent seemingly favourable comments from Barnier about moving towards a deal.

“Any scope for a deal to be achieved, particularly coming from one of the chief negotiators, is a bullish signal,” said Craig Erlam, market analyst at OANDA.

Sentiment, however, was hit earlier on Monday by warnings from a British former junior minister, Steve Baker, that the ruling Conservative Party could face a split if Prime Minister Theresa May persisted with her Brexit blueprint, known as the “Chequers” proposals.

Baker said 80 or more members of parliament were prepared to vote against the plan.

The comments, indicating the level of opposition within May’s party, came a day after former foreign minister Boris Johnson described part of the plan as “a suicide vest”.

“Westminster is going to be a cloud over sterling before the Tory conference,” ING’s Patel said, referring to May’s party gathering starting on Sept 30.

Headlines on the progress of Brexit negotiations have forced traders to switch positions rapidly in a market that is holding about $5.5 billion in short positions on the pound, based on weekly futures positioning data.

Reuters polls show sterling rising as much as six percent in a year, but a Brexit without any deal between London and Brussels could push it as much as eight percent lower from current levels.